Ashok Sreenivas & Daljit Singh: Governance gaps in the gas sector

The New Exploration and Licensing Policy (NELP), formulated eight years ago to spur the exploration of oil and gas fields in the country has yielded dramatic dividends in the form of gas finds. Finds from just the first three rounds of NELP amount to roughly 70 per cent of all our crude oil imports today, can power more than 25 Dabhol-like power projects, and are roughly equivalent in energy terms to the maximum projected capacity of power generation from the nuclear deal by 2032!

However, this good news is marred by some serious governance failures in the sector such as the delay in setting up a regulatory body; not taking cognisance of the emerging natural gas industry structure; the lack of a gas utilisation policy to balance economic efficiency, affordability, and energy security; and a lack of transparency and public participation.

Consider the issue of regulation. The pre-requisite to opening up any sector for private investment is to define the desired market structure and set up regulatory and other institutions before opening it up. However, the Petroleum & Natural Gas Regulatory Board (PNGRB), mandated to oversee downstream gas sectors, has only been recently constituted after considerable delays, while companies have already laid hundreds of kilometers of pipelines. The PNGRB is now required to formulate affiliate transaction rules to ensure that pipeline ownership does not provide any unfair advantage to a gas seller or allow the abuse of market power. One hopes that the rules so formulated do not become a case of closing the stable door after the horse has bolted.

The situation in the gas supply segment is also of concern due to the emerging market concentration. It is clear that gas supply in India will be dominated by just two players for about a decade to come: RIL and ONGC. Domestic gas finds by other players are very small in comparison, while importing gas as LNG offers only a high-priced alternative, and importing gas through pipelines is stuck in international negotiations and unlikely to materialise in the near future. Compare this emerging duopoly with the situation in the US, which not only has 8,000 producers of natural gas, but also has strong mechanisms, such as strict guidelines to monitor mergers and acquisitions, to pre-empt the formation of structures that enable one or few companies to exercise market power. The PNGRB's jurisdiction does not extend to upstream activities and it is the Competition Commission that is responsible for preventing the abuse of market power.

Given the importance of gas, particularly to the fertiliser and power sectors and for national energy security, there is a crying need for a policy that outlines how competing demands will be met while addressing issues of economic efficiency, affordability and long-term gas availability. But eight years after the NELP roll-out and four years after the gas finds off KG basin were announced, the Ministry of Petroleum and Natural Gas (MoPNG) still has not formulated a gas utilisation policy! The recent decision on gas pricing from the KG basin was instead a reactive knee-jerk response from the government. Ironically, the Production Sharing Contract (PSC), whose sanctity was used to approve the suggested pricing formula, discusses the need to have such a policy in place!

When the MoPNG does formulate a policy for gas utilisation, it must keep in mind that the efficient utilisation of gas is extremely important. Gas must be used in the best interests of society keeping in mind the potential for massive gains in energy efficiency and long-term energy security.

The lack of transparency has been another defining feature of the natural gas sector. Very little key information such as the actual production sharing contracts, bidding and bid evaluation under NELP, the capital investments under different blocks, the likely production schedule, and so on, is available in the public domain. It is illustrative to compare this process with that used to formulate the Electricity Act or policies associated with it, where each version of the draft was made publicly available, and feedback and suggestions were sought from all stakeholders. It is also expected that the bids for ultra mega power projects will be published. Such transparency has helped create better governance and regulatory institutions in the power sector and MoPNG should emulate the best practices from it.